As detailed in an earlier Duane Morris Alert, Section 503B of the Federal Food, Drug, and Cosmetic Act (FDCA) creates a new FDA-regulated entity called an "outsourcing facility," which is permitted to compound sterile drugs for human use with or without a prescription. Outsourcing facilities are required to register with FDA, comply with Current Good Manufacturing Practices (cGMPs), report adverse events to FDA and make semiannual reports to FDA of the drugs the facility compounds. Outsourcing facilities are also subject to FDA inspections on a risk-based schedule and are required to pay an annual establishment fee, as well as fees for reinspection.

In its Draft Guidance, FDA notes its current thinking on the parameters of calculating these various fees under Section 503B and the procedures for paying them.

Annual Establishment Fee

General. Starting in 2015, outsourcing facilities must pay an annual establishment fee and will not be considered registered as an outsourcing facility until the fee is paid. The annual registration for Section 503B facilities will start on October 1 and end on December 31 of the year preceding registration (e.g., fees for 2015 will be paid October 1, 2014, through December 31, 2014). Entities that register as outsourcing facilities prior to October 1, 2014, are not required to pay an annual establishment fee for 2014, but they will be required to pay the 2015 annual fee by December 31, 2014.

Procedure. In the Draft Guidance, FDA states that it expects to invoice the annual establishment fee no later than three business days after a facility submits its registration information. Entities should submit their registration information no later than December 10 to ensure that FDA is given sufficient time to review and invoice fees before the end of the registration period.

Calculating the Annual Establishment Fee. The annual establishment fee is calculated as $15,000, multiplied by an inflation adjustment factor, plus a small business adjustment factor. The full annual establishment fee must be paid regardless of when an entity registers as an outsourcing facility. For example, if a facility registers in May, which is outside of the October 1 to December 31 registration period, the full establishment fee will still be incurred.

Adjustment Factors. An outsourcing facility's annual establishment fee is subject to several adjustments.

First, Section 503B requires the annual establishment fee to be adjusted on an annual basis for inflation, which is then compounded every year.1 This is referred to as the inflation adjustment factor.

Second, the annual establishment fee may be adjusted for small businesses, referred to as the small business reduction. Facilities that qualify for the small business reduction are required to pay an annual establishment fee of only $5,000 multiplied by the inflation adjustment factor. In order to qualify for the small business reduction, a facility must have $1,000,000 or less in gross annual sales in the 12 months ending on April 1 of the fiscal year immediately preceding the year in which the annual establishment fee is assessed. Under Section 503B, "gross annual sales" means "total worldwide gross annual sales, in United States dollars … including the sales of all domestic and foreign affiliates of the outsourcing facility."2 Requests for the small business reduction must be made by April 30 of the year preceding the fiscal year for the applicable fee and must be resubmitted on an annual basis.

Third, entities that do not qualify for the small business reduction will find their annual establishment fees increased by a small business adjustment factor, which is the total amount lost from each "small business" outsourcing facility, divided by the total number of outsourcing facilities that are not granted a small business reduction. In other words, FDA will recoup the loss from small business reductions from outsourcing facilities that are not eligible for that reduction.

Reinspection Fee

Outsourcing facilities may also be subject to reinspection fees if FDA is required to reinspect the facility. A reinspection is defined as:

[O]ne or more inspections conducted under section 704 subsequent to an inspection conducted under such provision which identified noncompliance materially related to an applicable requirement of this Act, specifically to determine whether compliance has been achieved to [FDA's] satisfaction.

In other words, FDA will charge facilities a fee if it has to visit the facility more than once because of noncompliance identified during prior inspections. The reinspection fee is $15,000 multiplied by the inflation adjustment factor and will be invoiced after the reinspection. Small businesses are not entitled to a reduced reinspection fee and will be charged the full inflation-adjusted reinspection fee. Reinspection fees that are not paid within 30 days will accrue interest and fees until the fee is paid in full.

Effect of Failure to Pay Fees

Failing to pay required fees under Section 503B can have substantially adverse effects on outsourcing facilities. For example, drugs compounded in an outsourcing facility that has not paid the required annual establishment fee are not eligible for the Section 503B exemptions to the New Drug Approval (NDA) process or the adequate directions for use labeling requirements. Moreover, drugs compounded by a facility that has not paid required fees are deemed misbranded and may not be distributed in interstate commerce. Failure to pay the annual establishment fee also means that a facility is not considered an "outsourcing" facility under Section 503B.

Dispute Resolution

If an outsourcing facility seeks to dispute the denial of a small business reduction or believes that a reinspection fee was imposed in error, the facility may request that FDA reconsider the fee. Requests for reconsideration should be made within 30 days after FDA issues its decision with respect to a fee. In the Draft Guidance, FDA recommends that reconsideration requests state the facility's basis for concluding that FDA's decision with respect to a fee was in error, and to submit additional information relevant to the facility's position. The Draft Guidance also states that FDA "expects" to rule on reconsideration requests within four months.

If a request for reconsideration is denied, facilities may then appeal FDA's reconsideration decision. Appeal requests should be made within 30 days of the reconsideration decision and should include the original FDA decision, the request for reconsideration, the reconsideration decision and the facility's arguments in support of the appeal. New information may not be presented in the appeal.

Conclusion

The Draft Guidance is the latest step taken by FDA to implement its new authority under Section 503B, and is a key guidepost for 503B entities when considering whether to apply for Section 503 status. Comments to the Draft Guidance may be submitted by June 2, 2014. FDA is accepting comments electronically at http://www.regulations.gov or in writing to the FDA Division of Dockets Management. Further details on the procedure for submitting comments to the Draft Guidance are available on the FDA's notice in the Federal Register.

Notes

Specifically, the inflation adjustment factor is added to the total fee, and the total fee from the preceding year is used to calculate the inflation adjustment factor for the current year.

"Affiliate" is further defined as a "business entity that has a relationship with a second business entity if, directly or indirectly—(A) one business entity controls, or has the power to control, the other business entity; or (B) a third party controls, or has power to control, both of the business entities."

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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